Poplawski v Pryde

[2012] NZHC 2011

IN THE HIGH COURT OF NEW ZEALAND INVERCARGILL REGISTRY

CIV 2011-425-000117 [2012] NZHC 2011

BETWEEN  ZBIGNIEW JAN POPLAWSKI AND STEFAN DAVID POPLAWSKI Plaintiffs

ANDTHOMAS MCNEIL PRYDE First Defendant

ANDCRUICKSHANK PRYDE Second Defendant

AND  TE ANAU INVESTMENT NO. 1

LIMITED

Third Defendant

Hearing:         31 July, 1 and 2 August 2012 (Heard at Queenstown)

Counsel:         P W Michalik for Plaintiffs

M E Parker and A J Nash for First and Second Defendants

Judgment:      10 August 2012

JUDGMENT OF WHATA J

Introduction

[1]      Stefan  Poplawski  and  his  father  Pop  wanted  to  buy  a  helicopter  from Mr Thow  and  then  lease  it  back  to  him.    Mr Thow  wanted  to  buy  the  assets belonging to South West Helicopters Limited (“South West”).   To achieve their desired outcomes, they verbally agreed that Pop would transfer $350,000 to South West on the condition that Stefan would receive a 50% shareholding in the company buying South West’s assets as temporary security pending the purchase of the helicopter.  Stefan asked Mr Thow to get his lawyer to outline the arrangements in

writing.  Mr Pryde was South West’s lawyer, but at Mr Thow’s behest, he wrote an

POPLAWSKI V PRYDE HC INV CIV 2011-425-000117 [10 August 2012]

email dated 22 July 2009 to Stefan’s lawyer recording that the sale of South West’s assets was “unconditional,” with possession on 29 August 2009, and attaching a schedule of the assets.  He also recorded Mr Thow’s agreement to transfer 50% of the shares  in the company buying the asset, “as a temporary security” pending completion of Stefan’s deal with Mr Thow.

[2]      Stefan’s  lawyer  advised  Stefan  to  be  careful  and  suggested  additional security.  But Stefan and Pop thought the risk was small because South West’s assets were going to transfer to the new company.  On 27 July 2009, Pop transferred the

$350,000 to Stefan.  On 28 July 2009, Stefan transferred the $350,000 to South West. Mr Thow defaulted on settlement payment that was actually due on 29 July and on an extended settlement date of 7 August.  South West cancelled the agreement, kept the  deposit,  and  then  on  2 September,  sold  the  assets  to  a  different  company. Stefan’s  shareholding  in  the  new  company  was  worthless.     Mr  Thow  was bankrupted. Pop lost his money.

[3]      Stefan and Pop claim that Mr Pryde’s email was seriously misleading.  It did not refer to the multiple occasions over the previous seven months that Mr Thow had defaulted on payments to South West.  It did not record that Pop’s $350,000 was in fact critical to keeping the sale and purchase agreement alive.   It did not say that Mr Thow only had seven days from the email to come up with at least another

$1.5 million to settle the purchase.  They contend that Mr Pryde must have known that Mr Thow could not be relied upon to settle in such a short period and yet said nothing.  Had they known this, they would never have transferred the money.

Issue

[4]      I must resolve whether Mr Pryde’s email was misleading conduct for the purposes of s 9 of the Fair Trading Act 1986.  A key issue is whether, and if so to what extent, the potential intervention of legal advisers should colour the objective assessment of Mr Pryde’s conduct and/or the plaintiffs’ reliance on it. If I get that far, I will need to assess whether the impugned conduct was an effective cause of the plaintiffs’ loss.

Facts1

[5]      Zbigniew Jan Poplawski or Pop is an orthopaedic surgeon.   Stefan David Poplawski is Pop’s son.   Stefan is a chief pilot for a helicopter company, Alpine Choppers, a helicopter company owned by Brendan Thow, the third party.  Mr Pryde is a solicitor practising in Queenstown as a partner of the second defendant firm, Cruickshank Pryde.  Mr Pryde acted for South West.

[6]      From around 2006 to 2008, Mr Ian Buick and the other directors and owners of South West decided to sell the company.   Mr Thow expressed an interest in purchasing South West in 2008. They signed a heads of agreement for sale and purchase dated 23 November 2008.   The agreement was conditional as to finance until  30  November  2008,  and  provided  for  settlement  of  the  purchase  price  of

$3,900,000 by way of payments of:

a.        $100,000 on signing a sale and purchase agreement, b.     $2,900,000 on 17 December 2008,

c.        $400,000 on 1 June 2009, and

d.        $500,000 on 2 November 2009.

[7]      Mr  Thow  and  South  West  almost  then  immediately  looked  to  alter  the agreement and further negotiations ensued. This culminated in a second sale and purchase agreement dated 9 January 2008 (an  error for 9 January 2009).   This agreement was unconditional as to finance and provided for a settlement and possession date of 31 March 2009 (or such earlier date as the purchaser might settle the sale of his helicopter ZK-lllT).   The purchase price of $2,400,000 had been reduced due to the exclusion of one helicopter (H1H) from the purchase, and was payable:

a.        $100,000 on 9 January 2009,

b.$50,000   on   9   February   2009   (or   earlier   if   the   best endeavours of the purchaser would allow), and

c.$2,250,000  on  settlement  date  (being  31  March  2009  or earlier).

1      This narrative combines my findings with the statement of agreed facts.

[8]      Mr Thow  paid  the  initial  $100,000  deposit  due  under  the  agreement  on

12 January 2009, but failed to pay the second deposit of $50,000 when it was due on

9 February 2009 and then failed to settle the purchase on 31 March 2009. Nevertheless, South West informally allowed the settlement date of 31 March 2009 to run on to the end of May.  However by 19 May 2009, South West was becoming concerned about whether the sale would go through and Mr Pryde wrote to Mr Thow on behalf of South West giving three days notice of South West’s intention to cancel

the contract if the additional $50,000 deposit was not paid.2

[9]      Mr Thow responded to South West that he was having difficulties arranging funds to achieve settlement, because among things, the timing and cash/sales of helicopters  were  against  him.    He  made  a  further  proposal  to  restructure  the purchase, including removal of the agricultural side of the business and deferral of settlement on land.3    South West rejected Mr Thow’s proposals and Mr Thow paid the additional $50,000 deposit on 22 May 2009.

[10]     South West then wrote to Mr Thow on  27 May recording, among other things,  that  Mr Thow  had  confirmed  there  was  no  possibility of  settlement  by

29 May.    South  West  also  reminded  Mr  Thow  about  how  it  had  modified  the agreement to accommodate Mr Thow with the result that the purchase price was reduced from $4.15m to $2.4m.  The letter also refers to other potential buyers who are waiting in the wings.

[11]     At about the same time, Mr Thow wrote to the plaintiffs confirming that he wanted  to  free  up  some  equity  to  complete  a  purchase  of  South  West  Heli concessions and good will.   He outlined a proposal to sell them one of his BA helicopters for $1,250,000 with a lease back at $900 per hour for a guaranteed 300 hours per year.  But the deal could not be done without the purchase of the South West business as this would secure the additional flying hours needed.

[12]     As Pop was due to travel overseas in late June, Stefan was left to negotiate a possible purchase with Mr Thow.  Pop also left instructions to his lawyer, Richard

2       Agreed Bundle of Documents (“AGB”) at 59.

3      AGB at 65 and 66.

Walton, to arrange payment of $900,000 if necessary.  Stefan then signed a heads of agreement on 20 July 2009 with a purchase price of $1,200,000 with $900,000 to be paid on settlement day and the balance paid after Pop’s return.  It was also agreed that the helicopter would be leased back for 300 hrs per year at $900/hr insured and dry.

[13]     On  the  same  day,  Mr  Thow  and  South  West  signed  a  variation  of  the

9 January sale and purchase agreement.  This variation amended the purchase price to  $3,610,000,  based  on  the  re-inclusion  of  Helicopter  H1H  and  provided  for payment of this by:

a.        $150,000 deposits already paid,

b.        $350,000 further deposit, to be paid on 17 [20] July 2009, c.          $1,500,000 payable on 29 July 2009,

d.$400,000 payable on 1 December 2009, or earlier if title to a new heliport at Sandy Brown Rd should become available before that date,

e.        $1,210,000 for the re-included helicopter H1H on the date

1 year  after  settlement  and  possession,  or  earlier  if  the

purchaser’s best endeavours would allow – H1H to be rented for $12,604.16 per month in the meantime.

[14]     While  it  is  not  exactly  clear  when,  Mr  Thow  approached  Stefan  about releasing $350,000 of the purchase price to enable the purchase of South West. Stefan suggested he get his lawyer to record what was proposed.

[15] On 22 July 2009, Mr Thow visited Mr Pryde’s office. As a result of that visit, and also on 22 July 2009, Mr Pryde sent an email which the plaintiffs say contains the misrepresentations on which their claim is based. This email is recorded in full at [25]. The email was sent to Mr Maarten Dirkzwager, the lawyer for Stefan, of Timpany Walton in Timaru, and to Peter Garden, a director of South West Helicopters, and copied to Stefan personally, to Ian Buick, a director of South West Helicopters, to Brendan Thow, and to Mr Pryde himself.

[16]     Stefan then called Mr Dirkzwager.  Mr Dirkzwager’s notes of this call refer to the proposed purchase of the helicopter and the acquisition of South West. They also

refer to Mr Thow’s prior deposit of $150,000, the need for another $350,000 and that “once the sale locked, then can go to finance company to get funds to settle”.  On the purchase of the helicopter, the notes record that clear title cannot be obtained as it “belongs to finance company”.  They then refer to the company which owns all of South West and Alpine, and “(your 50% shareholder).”   The following notes also appear:

Query:   1.      How can we secure the funds?

2.     + what happens if fall through.

1.        SAA of BA in US.

2.        or Sth West falls through.

[17]     The notes also refer to the fact that Stefan has worked for Mr Thow for “a lot of years”, and then state “$3-4m in assets, but borrowed to the hilt”.

[18]     Mr Pryde called Mr Dirkzwager on 23 July.  Mr Dirkzwager’s notes record that Mr Pryde informed him that he did not act for Mr Thow in relation to the transaction but rather that he acted for South West.  It does not appear that the details of the proposal were discussed further, though Mr Dirkzwager’s notes suggest that Mr Thow was likely to ask Mr Pryde to draft the required documents.4

[19]     Mr Dirkzwager then spoke to Mr Thow. It is evident from the notes that security on the advance was discussed, including a second mortgage over a house and a personal guarantee.  It is further recorded that Brendan “had to have the money today”.  Mr Dirkzwager then spoke with Stefan again.  The advice apparently given was  that  it  “was  not  good  if  rushed.    Ideally  have  security  (esp  if  Brendon (Mr Thow) not ‘of substance’.)”

[20]     On 27 July 2009, at Mr Thow’s request, Mr Ian Buick, a director of South West Helicopters Ltd, emailed Stefan to provide South West Helicopters Ltd’s bank account for payment of the $350,000.  On 28 July 2007, Stefan arranged to pay the

$350,000 into South West Helicopters’ bank account by bank transfer.

[21]     Mr Thow and South West signed a further variation of the sale and purchase agreement dated 31 July 2009.  This variation allowed Mr Thow until 7 August 2009 to pay the settlement sum of $1,500,000 that had been due on 29 July 2009, and allowed him to take possession of South West’s business and assets on 1 August

2009 under a tenancy and bailment arrangement, terminable at the will of the vendor. On 1 August 2009, Mr Thow took possession of the South West business and assets.

[22]     Mr Thow made no further payments to South West, on 7 August 2009 or on any other date and on 17 August 2009, South West issued Mr Thow with:

a.a notice terminating the tenancy and bailment arrangement and repossessing South-West’s business and assets, and

b.a  settlement  notice  under  the  agreement  for  sale  and purchase, and

c.a notice calling up the unpaid balance of the purchase price under the agreement for sale and purchase.

[23]     On 2 September 2009, South West cancelled the agreement for sale and purchase and kept the deposits it had received, including the $350,000 paid by Pop and Stefan.   On the same day, South West then sold the business to Helicopters Otago Balclutha Ltd.

[24]     Mr Thow has been made bankrupt.  The third party proceedings against him are stayed.

The email

[25]     The key email states:

Hi Marrten (sic)

I am the lawyer for South West Helicopters Ltd, and am writing this letter in the presence of Brendan Thow.

Your client Stefan Poplawski is aware that this letter is being written, and copied to him, and I believe that you and Stefan have discussed this situation already.

Anyway, I have been asked to write to you to confirm as follows:

1..South West and Brendan have been negotiating for months about the sale to Brendan of the whole business of South West.

2..The sale is documented in signed agreements that are unconditional, and contemplate Brendan taking possession of the business on 29 August 2009.

3..Brendan and Stefan have tentatively agreed on the sale by Brendan to

Stefan of BA-Squirel (sic) S/N 1572.

4..Stefan asked for some information about the assets being purchased before he committed to the release of his $350000.00 funds on his purchase.

5..Attached hereto is a schedule extracted from the sale agreement listing all those assets.   You will see that near the foot of page 2 HIH (sic) is excluded. However a variation agreement executed subsequently has included this machine back in Brendan’s purchase.

6..Brendan has also asked me to formally record the agreement made with Stefan for him to have, as a temporary security pending completion of his deal with Brendan, a 50% shareholding in the new company South West Helicopter Group Ltd.   This company is already formed, and will be the vehicle that will be purchasing and owning all the SW and Alpine Choppers concessions and bases, and leasing in the helicopters including Stefan’s.

Hopefully  this  information  is  what  you  and  Stefan  require.    Please  let Brendan or me know if there is anything else that might be needed.   As Stefan  has  probably  told  you,  there  is  some  considerable  commercial urgency about you and Stefan discussing this, and Stefan paying over the

$350000.

Regards

Tom

The pleadings

[26]     The  plaintiffs’ primary claim  is  that  Mr Pryde’s  email  misled  them  into thinking that the sale and purchase of South West assets was likely to occur when the reverse was likely.

[27]     Fifteen omissions of fact are pleaded.5

[28]     In summary, the plaintiffs claim that the email omitted to record:

(a)      Mr  Thow’s  repeated  broken  promises,  breaches  of  contract  and

failures to settle;

(b)The terms of the 20 July 2009 variation, including the settlement date of 29 July and the agreement to make a deposit of $350,000 on 17

July 2009;

(c)       Mr Thow would need an additional $1.5 million at least by 29 July

2009; and

(d)      Mr Thow had not secured finance to complete the transaction.

[29]     The second amended statement of defence denies any misrepresentation.  The defendants respond with 14 particulars of their own.6   In short they say that:

(a)       No assurance or detail was sought from or contact made with the first or second defendants; other than

(b)Mr Pryde told Mr Dirkzwager to check whether a sale and lease document had been prepared;

(c)       The plaintiffs were advised by Mr Dirkzwager to obtain security and did not do so, or otherwise undertake prudent due diligence;

(d)The plaintiffs did not take steps to secure the helicopter or obtain repayment or otherwise mitigate their loss.

Plaintiffs’ case

[30]     In essence, Mr Michalik contends that the plaintiffs were lulled by various half truths contained in the email into a false sense of security that the critical transaction between Thow and South West could reasonably be expected to proceed to settlement on 29 August 2009.  In reality, it was not at all reasonable to expect the transaction to proceed smoothly to settlement.   Indeed, on the contrary, Mr Thow could be reasonably expected to fail to settle.   This was all seriously misleading particularly as Stefan was asked to act under urgency but without disclosing the

“very shaky state the deal was in”.   Once misled by the various “half truths”, the

plaintiffs were not obliged to make further enquiry.7

[31]     In terms of causation, they accepted that the $350,000 was unsecured until the  transfer  of  assets,  but  their  assessment  of  the  true  risk  was  distorted  by Mr Pryde’s failure to disclose Mr Thow’s shoddy performance to date.   Based on Mr Pryde’s email, they had no reason to expect that the sale would not proceed in accordance with the conditions specified therein, so any risk to them was small. Moreover, given Mr Pryde’s status, they were entitled to expect he would disclose information that was not confidential, about Mr Thow’s conduct to date. This duty is

overlaid by the general duty of a lawyer to act in good faith and honestly.8

Case for the defendants

[32]     The defendants say that the email was not capable of misleading the plaintiffs as to the likelihood or not of the South West transaction completing in accordance with the agreement for the sale and purchase.  No assurances on this were sought or given by Mr Pryde and he was not asked about Mr Thow’s ability to meet his obligations.  When the context of the transaction is examined as a whole, the email was merely one part of the whole series of pieces of information that the plaintiffs had, including information that Mr Thow had “borrowed to the hilt”, knew that the deal may not complete (having told their own solicitor as much), and that it would be important to get security for any loan or transfer of the $350,000, especially if “Brendan was possibly not of substance,” again as apparently indicated by them to their solicitor.

[33]     In  addition,  the  defendants  contend  that  the  plaintiffs  could  have  no reasonable expectation of disclosure of the kind of information they say they should have been told about, which was in any event confidential.   Mr Pryde identified himself in the beginning of the email as “the lawyer for South West Helicopters Limited.”  The plaintiffs had their own legal adviser and in fact the email was sent to

their lawyer.   Accordingly, to the extent that there are any omissions, they were

7      Citing Thompson v Vincent [2001] 3 NZLR 355 (CA) at [73].

8      Citing Dorbu v New Zealand Law Society [2012] NZHC 564.

matters that should have been addressed by the plaintiffs with their own advisers, before completion of a commercial transaction.

[34]    Nor were the plaintiffs misled by the email as to the likelihood of the transaction’s success.  There is no evidence that they were misled and no evidence of them relying on the email.   Mr Dirkzwager, their lawyer, does not appear to have been misled and his subsequent advice militates against the suggestion  that the Poplawskis were misled into thinking everything was going to be completed without issue.

[35]     Furthermore,  Mr  Pryde  was  clearly  acting  as  a  conduit  for  information supplied by Mr Thow.  He records in his email “anyway I have been asked to write to  confirm  as  follows,”  effectively  signalling  that  he  is  simply  passing  on information.

[36]     Moreover, Mr Parker contends that the plaintiffs elected to proceed on the basis of obtaining shares, without taking any steps to satisfy themselves that the shares had any value.  This is also said to be evidence of contribution to loss if any suffered by them.  The lackadaisical approach by the plaintiffs in failing to properly safeguard their own interests or, contrary to the advice from Mr Dirkzwager, to obtain proper security, compels a finding that the defendants should not be held liable for the consequences.

Framework of assessment: jurisdiction

[37]     Section 9 of the Fair Trading Act 1986 states:

9.        Misleading and deceptive conduct generally

No person shall, in trade, engage in conduct that is misleading or deceptive or is likely to mislead or deceive.

[38]      That section is:9

9       Red Eagle Corporation Ltd v Ellis [2010] NZSC at [28].

… directed to promoting fair dealing in trade by proscribing conduct which, examined objectively, is deceptive or misleading in the particular circumstances.

[39]     It is not necessary to show that the defendant had any intention to mislead or deceive anyone.10

[40]      Whether any conduct  is  misleading or  deceptive is  assessed  objectively, namely by reference to “whether a reasonable person in the claimant’s situation – that is, with the characteristics known to the defendant or of which the defendant ought to have been aware - would likely have been misled or deceived.”11

[41]     In order to qualify for a remedy under the Fair Trading Act the misleading conduct must be the effective cause or an effective cause of the loss suffered by the Poplawskis.

[42]     As the Supreme Court observed in Red Eagle Corporation Ltd v Ellis:12

The impugned conduct, in breach of s 9, does not have to be the sole cause, but it must be an effective cause, not merely something which was, in the end, immaterial to the suffering of the loss or damage. The claimant may, for instance, have been materially influenced exclusively by some other matter, such as advice from a third party.

[43]     There is no fixed route for assessment under s 9.  The approach to be taken in a particular case will depend on the type of situation under scrutiny.13    This case perhaps illustrates why that flexibility is necessary.  The parties posited three central issues,14 but argued the case on different bases – the plaintiffs contending for the two stage approach in Red Eagle,15 and the defendant employing the three questions set

out in AMP Finance NZ Ltd v Heaven.16

10     Ibid at fn 14.

11     See comments in Red Eagle at [28].

12 Ibid, at [29].

13 Ibid, at [26].

14     (a)      Was the email a misrepresentation?

(b)     Did that misrepresentation induce the Plaintiffs to make the payment of $350,000? (c)    Was the Plaintiffs’ carelessness also a cause of the loss which they have suffered?

15     See Red Eagle at [28]-[29]: the first step is for the claimant to prove a breach of s 9, and the second step requires the Court to look to see whether it is proved that the claimant has suffered loss or damage”by” the conduct of the defendant.

16     See AMP Finance NZ Ltd v Heaven (1997) 8 TCLR 144 (CA) at 152:  the first step is to ask whether the conduct was capable of being misleading, the second step is to consider whether the plaintiffs were in fact misled, and the third step is to consider whether it was reasonable in all the

[44]     In my view the following features of this case call for a slightly nuanced approach:

(a)       The primary complaint is about omissions or half truths;

(b)The impugned email was sent to the Poplawskis’ lawyer, and in the context of a commercial transaction;

(c)       Pop was not directly advised by Mr Dirkzwager; (d)   Pop, not Stefan, paid the deposit of $350,000.

[45]     This combination brings directly into frame the extent to which the potential intervention of legal advisers should colour the objective assessment of the conduct and/or  the  plaintiffs’  reliance  on  it.     I  think  it  should.  The  involvement  of Mr Dirkzwager    is    plainly    part    of    the    claimants’    “circumstances”17      or “characteristics”18  known to Mr Pryde.  The Court of Appeal in Heaven also stated

that the knowledge possessed by agents of objective facts and circumstances had to be imputed to the claimants in that case.19   Similarly in the present case, it would be unrealistic to disregard the ostensible function served by Mr Dirkzwager when assessing whether Mr Pryde’s conduct was misleading for the purpose of s 9. His presence was part of Mr Pryde’s frame or context for the email.

[46]     Complicating matters, Pop was not advised directly by Mr Dirkzwager. This must be factored into the assessment of objective reliance.

[47]     Against this background it is important in my view to carefully step through the objective assessment of the conduct so that the application of the Fair Trading Act in this case is transparent. I have therefore come to the view that in order to properly satisfy the Act’s purpose, it is necessary to approach the issue of breach of

s 9 in two parts, namely to assess:

circumstances for the plaintiffs to have been misled.

17     Goldsbro v Walker [1993] 1 NZLR 394 (CA) at 401.

18     Red Eagle at [28].

19     At page 153.

(a)       Whether the email was capable of being misleading, and if so;

(b)      Whether  a  reasonable  person  in  either  of  the  plaintiffs’ positions

would have been likely to have been misled.

[48]     If breach is established, I will then need to be satisfied that the defendants’ breach was an effective cause of loss.20   Whether either of the plaintiffs were in fact misled is relevant to this assessment, as is actual involvement of Mr Dirkzwager.

Was the email capable of being misleading?

[49]     Yes.   The email omitted information relevant to the sale and purchase of South West, with the result that the email portrayed the transaction in an uncomplicated way, when in truth it was very complicated and fraught with risk to the Poplawskis.   In my view, a person in the Poplawskis’ position would have reasonably expected accurate detail on the background, especially given:

(a)       The scale of deposit; (b)           The urgency;

(c)       The substantial benefit to Mr Pryde’s client; and

(d)The ostensible risk to the Poplawskis if the transaction was not concluded.

[50]      More specifically, the email is misleading in the following ways:

(a)      The  email   records  that  Mr  Thow  and  South  West  had  been “negotiating for months”. But “negotiating” is an inapt description of what in fact occurred.   Over a seven month period at least three

agreements had been executed.  Mr Thow did not meet the payment

20     Red Eagle at [29].

conditions  of  any  of  them,  except  one  deposit  of  $100,000  on

9 January 2009.  A payment of $50,000 in late May was well overdue and made under threat of cancellation of the agreement.

(b)The email states that the sale was “unconditional.”   While I accept that the agreement was unconditional as to finance,21 there is no mention that Mr Thow had not in fact been able to obtain finance to achieve settlement over the span of several months.  In addition, the final compromise reached on 20 July, just two days prior to the email, contemplated immediate payment of $350,000 and then $1,500,000 in nine days, that is, by 29 July 2009; a most unlikely proposition in light of Mr Thow’s previous inability to obtain finance.

(c)      The settlement date was recorded as 29 August 2009 when the actual date  was  much  earlier,  namely  29  July  2009.     This  was  an unintentional error.  But it meant that the Poplawskis were not aware of  the  tight  constraints  that  South  West  had  in  fact  placed  on Mr Thow.

(d)A H1H helicopter was listed to be received on 29 August 2009 worth approximately $1,500,000, when that was not so.  Settlement on the helicopter had been deferred for 12 months.  This gave the erroneous impression that the transaction was more substantial than it really was and afforded more surety than it really did.

(e)      The email  recorded  that  Stefan  will  have as  “temporary security” “50% of the shares of the new company” that “will be the vehicle ... purchasing and owning all the South West... concessions and bases...”. While that was also literally true, the scale of the risk that this “temporary security” may never eventuate was never signalled. Furthermore, it appears that the transaction was not advanced through the new company, with the effect that the Poplawskis were never

made aware of the 29  July deadline or  extension to  7 August  or

21     I accept this is what was meant by Mr Pryde when he used the term “unconditional.”

otherwise  of  the  fragility  of  the  transaction  until  after  notice  of cancellation.

[51]     It was also clear on available documentation that South West were anxious about Mr Thow’s previous non compliances.   Compelling in this regard is a draft letter  dated  27  May  2009  (only  one  month  prior  to  the  email)  recording  the following:

As you are aware and would expect, considerable uncertainty and anxiety has occurred as a result of the delays and uncertainties that have occurred, and will remain as a consequence of the non settlement on Friday.  This has placed our company in a very awkward situation to say the least. ....

I have kept our lawyer Tom Pryde informed of developments and have spoken to him again today about this.  He is happy that we negotiate with you around any new proposal you might have, but said that we should make clear to you that the existing contract is still in existence and binding and any negotiation is accordingly without prejudice and does not alter the legal situation until we might reach any new agreement with you.

[52]     This was then followed by the July agreement, with its very short timetable for deposit and settlement.  I accept there was evidence that South West thought by this stage Mr Thow might secure cash from sale of his helicopter to Pop and from the sale of a helicopter in the United States.22   Nevertheless achieving settlement on the sale of the South West assets within seven days of the email and then within a day of its payment was obviously far from secure given the prior failures to settle.   The

significance of that is twofold.  First, objectively assessed, the risk to the Poplawskis was very significant.  Second, the shares in the new company to buy the assets could not possibly provide “temporary security” of any kind, at least until settlement had been achieved.   But the (unintended) impression left by Mr Pryde’s email is that there is no reason to suspect settlement would not be achieved and thus the shares

would afford a form of security.

22     An issue arose at hearing as to the admissibility of evidence about this sale.  It came in response to a question of Mr Pryde under cross examination. The information was apparently privileged. I had Mr Parker confirm that it was properly privileged, and he did so.  Mr Parker also said it would be appropriate in the circumstances to disregard this evidence given that privilege is claimed.   I have come to the view that it would be inappropriate for the Court to disregard information that bears on the credibility of a witness and in this case, a defendant, especially as the information was adduced through cross examination.  Moreover, given where I have got to on  this,  I  do  not  consider  that  admissibility  of  otherwise  probative  evidence  is  unfairly prejudicial to the plaintiffs.

[53]     I do not accept that the defendants were not under any obligation to disclose further information about the background to the sale and purchase of South West’s assets.  Mr Parker says that the plaintiffs did not seek any assurances.  But the duty to not mislead arises, in this context, from s 9 of the Fair Trading Act.   Once Mr Pryde elected to make a representation to the plaintiffs about the South West transaction, knowing that the Poplawskis were considering whether to make the deposit for the benefit of his client, he was obliged by s 9 to do so in a way that was

accurate.23     He did not do this.   While I am satisfied he was not intentionally

inaccurate, the email cast the transaction in an unreasonably favourable light.  To the extent that this disclosure would have clashed with his duties to his client, South West, he should have refused to make the representations contained in the email on Mr Thow’s behalf.

[54]     I  was  initially  concerned  about  the  floodgates  opening  against  well- intentioned but mistaken lawyers transmitting inaccurate information on behalf of their clients.   But I can see no legitimate basis for protecting lawyers from the rigours of the Fair Trading Act other than the protection otherwise afforded to all participants in trade.   In any event, each case will turn on its own merits, and whether, in context, the transmitted information was objectively inaccurate and misleading.   I turn now to how the context in this case modifies Mr Pryde’s culpability, if any, under s 9.

Would a person in either of the plaintiffs’ positions be likely to have been misled by the email?

[55]     I  consider  however  that  it  was  reasonable  for  Mr  Pryde  to  assume  that Mr Dirkzwager would recommend appropriate due diligence in the context of a reasonable substantial commercial transaction. This informs the objective assessment of the nature of Mr Pryde’s conduct and strongly militates against a finding that a person in either of the plaintiffs’ positions, properly advised, would likely have been

misled by the email.  Furthermore, the Fair Trading Act does not provide a guarantee

23     cf London General Omnibus Company Limited v Holloway[1912] 2 KB 72 at 79; Shivas v Bank of New Zealand [1990] 2 NZLR 327 at 363.

as to outcome,24 and while the email left an erroneous impression, it fell well short of providing  a  positive  assurance  that  the  transaction  would  settle  and  the  assets transfer to the new company.  But it seems to me that the protective purpose of s 9 is better served by taking a firm line in respect of statements that tend to mislead.25   I therefore proceed on the basis that I must be satisfied that there is objective information supporting the conclusion that the conduct was not misleading. In light of the direction from the Court of Appeal in Heaven, for that purpose I must examine the imputed knowledge of persons in the Poplawskis’ position.

[56]     As it happens, it is reasonable to deduce from Mr Dirkzwager’s file notes that he cautioned Stefan against any hasty purchase without proper security.26    It is also evident from notes taken down by Mr Dirkzwager at the time that they knew that Mr Thow did not yet have finance.  There is the following note in Mr Dirkzwager’s file notes of his discussion:

Brendan [Mr Thow] now in situation.

Paid $150,000  dep

Need         another         $350,000        for        deposit

Once the sale locked, then can go to finance company to get funds to settle

[57]     Another file note refers to Mr Thow having “borrowed to the hilt”.  There is then the further file note of advice from Mr Dirkzwager that “ideally” they would have “security (esp if Brendan poss not ‘of substance’).”  This recommendation to take security is not compatible with an assumption that there was no or little risk of settlement not proceeding.   Indeed, the objective information available to Mr Dirkzwager and Stefan about Mr Thow’s financial circumstances, and the direct advice to take separate security, offset in my view the key omissions about the

transaction’s troubled history.

24     De Forges v Wright [1996] 2 NZLR 758 (HC) at 765.

25     Ibid, at 764.

26     Regrettably Mr  Dirkzwager had  little  or  no  memory of  the  discussions.     For  a  complete summary of file notes refer [16]-[19] above.

[58]     My position might have been different had the misleading conduct involved a positive misrepresentation, as was the case in Goldsbro v Walker27 and in Heaven.  In Goldsboro, solicitors represented to another firm of solicitors that they represented a purchaser on the sale of a property. This was not true. When the sale failed, the solicitors were held to be liable. There was nothing the vendors’ lawyers could do or have done to mitigate the impact of the misrepresentation. In Heaven, the defendant,

AMP Finance, included a clause in a loan agreement stating that the extent of the loan was much greater than it actually was. There was no objective evidence to suggest that the borrowers’ lawyer apprised them of the mistake. By contrast, in the present case there is clear objective evidence that Mr Dirkzwager and Stefan knew about Mr Thow’s financial position and the need for security.

[59]     Accordingly, approaching the assessment objectively, a reasonable person in Stefan’s position would have been on enquiry, aware of the risks and would not have transferred $350,000 to South West without any formal security.   In my view therefore, I do not consider that a reasonable person in Stefan’s position would likely have been misled by Mr Pryde’s email.

[60]     I have a residual concern, nevertheless, as to whether but for the email, a reasonable person in Pop’s position would have sought out further and separate formal security.  Was he, as Mr Michalik suggests, so “lulled ... into a false sense of security”  that  he  did  not  look  further?    Pop  did  not  have  direct  contact  with Mr Dirkzwager through the key period.  There is nothing to suggest that Stefan made him aware of the facts revealed in Mr Dirkzwager’s notes.  But it is evident that he relied on Stefan and Mr Dirkzwager to protect his interests and they were effectively his agents.

[61]     The question then arises as to whether a person in Pop’s position should for the purpose of this hypothetical analysis be imputed with the knowledge possessed by Stefan.  That is, it appears, required by the Court of Appeal in Heaven.  I have resolved that it should.  The tipping point is that the email is at all times directed to Stefan’s interests.  There is no mention of Pop or that Pop will be separately relying

on  the  email.    Mr  Pryde  could  not  be  expected  to  have  knowledge  of  Pop’s

27     Goldsbro v Walker, above n 17.

circumstances independently of Stefan’s interests and legal representation. Accordingly, I am satisfied that there has been no breach of s 9, because a reasonable person in Pop’s shoes, imputed with Mr Dirkzwager and Stefan’s knowledge, could be expected to have acted with more care and sought separate security.

[62]     I also observe for completeness that nothing in the evidence suggests to me that Mr Pryde knowingly sought to mislead the Poplawskis. While that is no defence to objectively misleading conduct, that aggravating feature is not present.   I also accept his evidence that he advised Mr Dirkzwager that he should check on whether a sale and leaseback agreement had been drafted.  Mr Pryde’s recollection on this

aspect was clear.28    Mr Dirkzwager’s was not. This further mitigated any impact of

the omissions identified above.

Loss and contribution

[63]     In case I am wrong in my analysis of breach, I address the issue of loss and contribution.  I am satisfied on the evidence that the email was an effective cause of the decision to make the deposit.  It might be thought that the assessment of breach and causation should be co-extensive in terms of reasonable reliance placed on the email.  But misled complainants do not necessarily act in a reasonable way.  There will   be  circumstances   where,   as   in   Red   Eagle,   the  reasonableness   of  the complainant’s conduct is a matter of causation or contribution, not breach.

[64]     Both Stefan and Pop decided to invest on the assumption that it was safe to do so and in part due to the erroneous impression left by the email. However, for the reasons I have already expressed, I consider the plaintiffs should have pursued the transaction with more care, particularly given independent legal advice to seek security.  While the impression left by the email was misleading, it was quite plain that they knew that they proceeded on an essentially unsecured basis until settlement

had been completed. Stefan conceded this in cross-examination.29   Mr Dirkzwager’s

notes in this regard are also revealing.  They record after mentioning that Brendan has borrowed to the hilt:

28     Transcript of evidence at 176-177.

29     Transcript of evidence at 134.

All you care about is getting the helicopter at your Queenstown base and with guaranteed hours

[65]     Plainly they assumed a significant risk of failure notwithstanding any false hope generated by the email.  The nexus therefore between the misleading email and their loss was substantially broken.   For a similar reason, the main contributor to their loss was their failure to secure their investment properly.  Accordingly, had I found an actionable breach, I would have reduced the award by 50% to reflect the limited role played by the defendants (as compared to Mr Thow), their indirect relationship to the Poplawskis (ie via Mr Dirkzwager) and the plaintiffs’ contribution

to their own loss.30

Conduit?

[66]     For completeness, I do not consider that Mr Pryde could rely on the conduit defence.   It may be that his record of Mr Thow’s proposal simply passed on information.  But the email must be read as a whole.  Mr Pryde held himself out as South West’s lawyer.  Plainly he had direct knowledge and involvement in the sale and purchase of its assets to Mr Thow.   By conveying information about the transaction he lent his imprimatur to it in terms of its accuracy.

Result

[67]     Mr Pryde’s email did not breach s 9 of the Fair Trading Act 1986.

30     cf Hamid v England HC Auckland CIV 2009-404-003697 26 September 2011 at [133].

Costs

[68]     I  reserve  leave  to  the  parties  to  seek  costs.    But  the  first  and  second defendants may wish to reflect on their (albeit unintentional) role in the Poplawskis’ misfortune before seeking costs.

Solicitors:

Morrison Kent, Wellington, for Plaintiffs

M E Parker, Queenstown, for Defendants

a.      Mr Thow was in default of his obligations under the ASP.

b.     Mr Thow had originally committed to settle the purchase from South West on

29 March 2009.

c.Mr Thow had failed to settle in March 2009, defaulting on his obligations under the ASP.

d.For about 4 months between 29 March 2009 and 20 July 2009, Mr Thow had remained in default under the ASP, his defaults informally being tolerated by South-West as vendor.

e.During this period Mr Thow had made various promises and had agreed to a number of different arrangements under which he was to cure his defaults, but he had not done so.

f.      By variation to the agreement signed on 20 July 2009, South-West had agreed to extend settlement date of 29 July 2009, thus temporarily regularising Mr Thow’s position.

g.      In return, Mr Thow agreed to pay an additional deposit of a further $350,000 by 17 July 2009.

h.Mr Thow had defaulted on the obligation to pay the additional deposit created by the varied agreement.

i.       At  the  date  and  time  the  representations  were  made,  South-West  had  an accrued right to cancel the ASP on three day’s (sic) notice for Mr Thow’s failure to pay the agreed additional deposit.

j.      If Stefan’s and Pop’s $350,000 was committed to the purchase, the money

would be received as the additional deposit.

k.     The $350,000 was not sufficient money to settle the transaction.

l.       If  paid,  the  $350,000  additional  deposit  was  at  risk  of  forfeiture  if  the transaction was not completed.

m.     Mr Thow would need more than $1.5 million dollars over and above the

$350,000 additional deposit to settle the transaction.

n.     Settlement was due on 29 July 2009.

o.Mr  Thow’s  defaults  and  late  compliance  with  his  obligations  under  the contract indicated:

i.       that he had not secured the finance needed to complete the transaction, and also

ii.      that the risk he would fail to secure the necessary finance in the short timeframe available under the contract as it stood was high.

a)The Plaintiffs at no stage either directly or indirectly sought any assurance of any kind whatsoever from the First and/or Second Defendants about the Agreement   for   Sale   and  Purchase   between   the  Third   Defendant   and Mr Brendan Thow;

b)     The  Plaintiffs  at  no  time  contacted  the  First  and/or  Second  and/or Third

Defendants in relation to the said Agreement for Sale and Purchase;

c)Upon receipt of the email dated 22 July 2009 addressed to their solicitor, Mr Maarten Dirkzwager, of Timpany Walton, Timaru, and copied to them, the Plaintiffs failed to make any inquiry of Mr Brendan Thow, or any of the Defendants for any further information beyond that contained therein and attached thereto;

d)The Plaintiffs at no time by themselves directly, or through their solicitor, Mr M  Dirkzwager,  in  any  way  made  request  of  the  First  and/or  Second Defendants for details relating to the status or progress of the transaction between the Third Defendant and Mr Thow;

e)On receipt of the said email, the Plaintiffs by themselves or their solicitors failed to bring to the attention of the First and/or Second Defendants their alleged arrangements with Mr Thow...;

f)      The Plaintiffs contributed $350,000 to Mr Thow pursuant to the alleged arrangements ... without obtaining the security of any executed agreements with Mr Thow in respect of the payment of that sum, or undertaking any or any prudent due diligence in relation to Mr Thow;

g)     The Plaintiffs failed to document in any way their alleged arrangements with

Mr Thow ...;

h)The  failures  in  f)  and  g)  are  all  the  more  significant  because  the  First Defendant  alerted  Mr  Dirkzwager  to  these  precautionary  measures  by telephone on 23 July 2009, specifically stating that he should check whether a sale and lease document had been prepared as the First Defendant doubted that such basic elements had been dealt with and Mr Dirkzwager indicated that he would  discuss  those  measures  with  both  Mr  Thow  and  his  clients  the Plaintiffs;

i)      In light of this telephone conversation with the First Defendant on 23 July

2012, Mr Dirkzwager had a telephone conversation with the Second Named

Plaintiff later that day and advised that there were risks associated with the transaction with Mr Thow.  He further suggested that the Plaintiffs obtain

proper security for their advance of $350,000 but the Plaintiffs declined to

take Mr Dirkzwager’s advice in this regard and neglected to obtain proper

security from Mr Thow for their advance.

j)      At all times the Plaintiffs displayed negligence in providing an undocumented advance of $350,000 to Mr Brendan Thow;

k)     The Plaintiffs have failed to take professional advice in relation to their contractual alleged arrangements with Mr Thow ... or, if they did receive such advice, failed to act prudently upon it;

l)      The Plaintiffs have failed to take any steps to complete the alleged purchase of the said helicopter...;

m)     The Plaintiffs have failed to take any timely steps to obtain repayment from

Mr Thow of the moneys advanced to him.

n)     The Plaintiffs have failed to mitigate their loss in any way.